OG&E 2011 Annual Report Download - page 39

OGE Energy Corp. 37
Enogex, through OER, engages in energy marketing, trading, risk
management and hedging activities related to the purchase and sale
of natural gas as well as hedging activity related to the sale of natural
gas and NGLs on behalf of the Company. Contracts utilized in these
activities generally include purchases and sales for physical delivery of
natural gas, over-the-counter forward swap and option contracts and
exchange traded futures and options. OER’s transactions that qualify
as derivatives are reflected at fair value with the resulting unrealized
gains and losses recorded as price risk management (“PRM”) Assets or
Liabilities in the Consolidated Balance Sheets, classified as current or
long-term based on their anticipated settlement, or against the broker-
age deposits in Other Current Assets. The offsetting unrealized gains
and losses from changes in the market value of open contracts are
included in Operating Revenues in the Consolidated Statements of
Income or in Other Comprehensive Income for derivatives designated
and qualifying as cash flow hedges. Contracts resulting in delivery of
a commodity are included as sales or purchases in the Consolidated
Statements of Income as Operating Revenues or Cost of Goods Sold
depending on whether the contract relates to the sale or purchase
of the commodity.
Natural Gas Purchases
Estimates for gas purchases are based on estimated volumes and
contracted purchase prices. Estimated gas purchases are included in
Accounts Payable on the Consolidated Balance Sheets and in Cost of
Goods Sold on the Consolidated Statements of Income.
Purchase and Sale Contracts
OER utilizes energy purchases and sales for physical delivery of natural
gas and financial instruments including over-the-counter forward swap
and option contracts and exchange traded futures and options. The
majority of these activities qualify as derivatives and are recorded at fair
market value. OER’s portfolio is marked to estimated fair market value
on a daily basis. When available, actual market prices are utilized in
determining the value of natural gas and related derivative commodity
instruments. For longer-term positions, which are limited to a maximum
of 60 months and certain short-term positions for which market prices
are not available, models based on forward price curves are utilized.
These models incorporate estimates and assumptions as to a variety of
factors such as pricing relationships between various energy commodi-
ties and geographic location. Actual experience can vary significantly
from these estimates and assumptions.
In nearly all cases, independent market prices are obtained and
compared to the values used in determining the fair value, and an over-
sight group outside of the marketing organization monitors all modeling
methodologies and assumptions. The recorded value of the energy
contracts may change significantly in the future as the market price for
the commodity changes, but the value of transactions not designated
as cash flow hedges is subject to mark-to-market risk loss limitations
provided under the Company’s risk policies. Management utilizes models
to estimate the fair value of the Company’s energy contracts including
derivatives that do not have an independent market price. At December 31,
2011, unrealized mark-to-market gains were $2.9 million, none of which
were calculated utilizing models. At December 31, 2011, a price movement
of one percent for prices verified by independent parties would result in
unrealized mark-to-market gains or losses of less than $0.1 million and
a price movement of five percent on model-based prices would result
in unrealized mark-to-market gains or losses of less than $0.1 million.
Valuation of Assets
The application of business combination and impairment accounting
requires Enogex to use significant estimates and assumptions in deter-
mining the fair value of assets and liabilities. The acquisition method
of accounting for business combinations requires Enogex to estimate
the fair value of assets acquired and liabilities assumed to allocate the
proper amount of the purchase price consideration between goodwill
and the assets that are depreciated and amortized. Enogex records
intangible assets separately from goodwill and amortizes intangible
assets with finite lives over their estimated useful life as determined by
management. Enogex does not amortize goodwill but instead annually
assesses goodwill for impairment.
In 2011, Enogex completed an acquisition accounted for as a
business combination as discussed in Note 3 of Notes to Consolidated
Financial Statements. As part of this acquisition, Enogex engaged the
services of a third-party valuation expert to assist it in determining the
fair value of the acquired assets and liabilities, including goodwill; how-
ever, the ultimate determination of those values is the responsibility of
Enogex’s management. Enogex bases its estimates on assumptions
believed to be reasonable, but which are inherently uncertain. These
valuations require the use of management’s assumptions, which would
not reflect unanticipated events and circumstances that may occur.
Depreciable Lives of Property, Plant and Equipment and
Amortization Methodologies Related to Intangible Assets
The computation of depreciation expense requires judgment regarding
the estimated useful lives and salvage value of assets at the time the
assets are placed in service. As circumstances warrant, useful lives are
adjusted when changes in planned use, changes in estimated produc-
tion lives of affiliated natural gas basins or other factors indicate that a
different life would be more appropriate. Such changes could materially
impact future depreciation expense. Changes in useful lives that do
not result in the impairment of an asset are recognized prospectively.
The computation of amortization expense on intangible assets requires
judgment regarding the amortization method used. The intangible asset
should be amortized over its useful life using a method of amortization
that reflects the pattern in which the economic benefits of the intangible
asset are consumed.